financing a new business – 11/12 - inspire financial learning€¦ · entrepreneurship: the...

11/12GRADESFinancing a new business –

indoor bike park

In this lesson, students will learn about the di� erent fi nancial options entrepreneurs use to raise money for a business.

Subject BDI3C – Entrepreneurship: The VentureBDP3O – Entrepreneurship: The Enterprising PersonBDV4C – Entrepreneurship: Venture Planning in an Electronic AgeBAT4M – Financial Accounting Principles

Suggested timing 70 minutes

Financial literacy objectives

At the end of this lesson, students will:• use fi nancial terminology fl uently; • use data to make fi nancial decisions;• identify methods of obtaining capital for fi nancing a

business;• analyze pros and cons of investing in a business

venture.

Curriculum expectations

Business Studies, Grades 11 and 12 (2006)Entrepreneurship: The Venture (BDI3C)

The Financial Plan• identify sources and methods of fi nancing their chosen venture (e.g., government

loans, private investors, bank loans, loans from family and friends, credit from suppliers).

Entrepreneurship: The Enterprising Person (BDP3O)

Entrepreneurial Characteristics and Factors A� ecting Successful Entrepreneurship• identify the attitudes, attributes, and skills common to many entrepreneurs;• identify some Canadian and local entrepreneurs and describe their achievements;• describe the barriers that various entrepreneurs (e.g., women, people with

disabilities, Aboriginal peoples, new immigrants, people from various ethnocultural minorities) have faced in the past and the factors that are contributing to their success today (e.g., funding, education, changing attitudes, mentoring);

GRADES 11/12Financing a new business – indoor bike park GRADES 11/12

• describe the roles of entrepreneurs that benefi t communities and society (e.g., agents of change, creators of jobs and wealth, role models of ethical behaviour, advocates for community development).

Entrepreneurship: Venture Planning in an Electronic Age (BDV4C)

Financing• estimate the amount of capital that would be required to launch their venture;• identify the advantages and disadvantages of various sources of capital for their

venture (e.g., family, personal savings, bank loan, private equity, government grants); • develop an eff ective strategy for raising capital for their venture.

Financial Accounting Principles (BAT4M)

Financial Accounting• compare the advantages and disadvantages of debt fi nancing and equity fi nancing;• describe alternative sources of funding available to businesses (e.g., venture

capital, government loans and grants).

Assessment Collect worksheets, posters and/or crossword.

What you need • Financing options (Appendix A)• Financing options chart (Appendix B)• Financing characteristics – cut into strips (Appendix C)• Financing options pros and cons worksheet (Appendix D)• Crossword puzzle (Appendix E)• Financing options chart (solutions, Appendix F)• Financing options pros and cons worksheet (solutions, Appendix G)• Crossword puzzle (solutions, Appendix H)• Bag or hat to be used for a draw• Poster boards


Context for learningBill Fold is a character who is constantly getting himself into fi nancial scrapes. Use the scenario below to provide students with a context for learning.

Bill Fold and his buddies love to ride their BMX bikes throughout the year. However, during the winter months, they fi nd it hard to do tricks outside in the snow. Bill has a brilliant idea for a business venture. He could rent the old warehouse near his house and build ramps for an indoor bike park. He could make a profi t if he charged a fee for the use of the park. Bill would need fi nancing to get this brilliant idea of his going. But where and how will he get the capital to get this project off the ground?

From what you know of various fi nancing options, what kind of fi nancing would you recommend he pursue?

Minds on Ask students to think of some Canadian entrepreneurs who have started successful companies. Ask a volunteer(s) to write on the board the names of the entrepreneur and the company.

In a trivia-style format, ask students if they could identify the following:• entrepreneur’s business or industry;• how he/she might have raised money to get started;• impact of business (e.g., economic, societal, cultural, etc.).


Action Explain that there are diff erent methods to raise capital: (i) equity and (ii) debt fi nancing. Distribute copies of Appendix A and review the diff erence between debt fi nancing and equity fi nancing and give examples.

Think-Pair-ShareStudents turn to the person beside them and explain in their own words the term “equity” and “debt” to their partner. Ask the partners to diff erentiate between the two forms of funding by sharing examples.

Activity• Distribute fi nancing options chart (Appendix B)• Divide students in 4 groups and assign each group a fi nancing option

(i.e., government grant, friends and family, venture capital, bank loan).• Each group decides if their option represents debt or equity fi nancing.• Put the strips of paper containing the fi nancing characteristics in a bag and have

students draw a slip from the bag until all the strips have been distributed.• Taking turns, students read their fi nancing characteristic aloud to the class and

identify the fi nancing method to which it could apply. As a class, discuss answers to come to an agreement.

• Students will individually complete Appendix B by checking off all applicable fi nancing issues related to their various fi nancing options.

Entrepreneur Business/industry Financing method

Mike LazaridisResearch in Motion/

TechnologySavings, family investors

J. William Billes and Alfred Billes

Canadian Tire/Retail Savings

Dean and Dan CatenDesigners - DSquared2/

FashionFinancial backer

John MolsonMolson Breweries/

Beer, Wine and SpiritsFamily funds

Ed MirvishHonest Ed’s – Mirvish

Productions/Retail or Entertainment

Fund from life insurance policy

Chris Haney and Scott Abbott

Trivial Pursuit/inventors Sold shares

Teacher: Examples of entrepreneur, business and fi nancing method:


Action (cont’d) • In their groups, students discuss how an entrepreneur would estimate the amount of funds required to launch his/her business and what documents might be required when seeking fi nancing.

• Students then prepare posters marketing their type of fi nancing. Students should include the pros and cons of acquiring capital through their particular method of fi nancing.

• Mount completed posters on classroom walls.

Consolidation/debrief

Distribute a copy of Appendix C and/or the crossword (Appendix E) to all students.

Students circulate around the classroom completing their worksheets by looking at the various posters.

Discuss with students the following questions:1. Explain the diff erence between debt and equity fi nancing.2. Which would you prefer to receive as an entrepreneur and why?3. If you were a lender providing fi nancing, would you rather provide debt or equity

fi nancing? Why?4. If you were asked to invest in a new venture, what non-fi nancial factors might you

consider before investing in a new business?


Debt fi nancing Equity fi nancing

• Provided by a creditor (must be repaid at some pre-determined date)

• Can be diffi cult to repay• Interest must be repaid as well as the principal• Debt covenants (restrictions placed on fi nancing)

can occur• If the borrower (entrepreneur) does not adhere

to restrictions, loan can be recalled, terminated or forcibly repaid immediately

• Using savings to inject new equity into the business

• Primarily done through personal and/or family savings

• Can be done by an outside investor, purchasing equity (ownership interest) in the company

Debt fi nancing in more detail

PersonalMoney that comes from your savings, sale of assets, credit cards, leveraging assets, etc.

Credit cards:• Instant access to cash. • There are high penalties for failing to pay money back on time.

High annual fees, high interest rates (>20%), annual fees and late charges are all potential problems.Leveraging a home:• Home equity loan means taking a second mortgage from a bank, using your home as collateral.• The entrepreneur must make additional payments on top of fi rst mortgage. • Failing to make these payments, the bank takes the home.• Interest rates for these kinds of loans are high.

Friends and familyThis type of fi nancing can be obtained quickly as it is based more on personal relationships than on fi nancial analysis. • Friends and family who provide loans sometimes feel they have the right to off er suggestions concerning

the management of the business.• Tough business times may strain the bonds of friendship and family relationships.• Repayment terms are usually more generous than other options (i.e., banks). • Interest may/may not be charged.

What are the di� erent fi nancing methods available?

A P P E N D I X A


What are the di� erent fi nancing methods available? (cont’d)

A P P E N D I X A

Chartered banks and credit unionsThese fi nancial institutions are primarily lenders of debt capital to small businesses.

Can take out a term loan/mortgage: interest and principal must be prepaid.Can take out a line of credit: lender provides credit up to a stated amount, which is backed by the company’s inventory and receivables.

Government sponsored programs and agenciesThere are a few government programs that provide fi nancing to small businesses. Although funds may be available, they may be diffi cult to acquire.

Canada Small Business Financing program: provides fi nancing to small businesses through fi nancial institutions, for which the federal government guarantees repayment.

Loans• Loans can be used to fi nance buildings and land, commercial vehicles, equipment and software, and

leasehold improvements. • Loans cannot be used to fi nance working capital, inventory, franchise fees, research and development. • The cost of the loan is determined by the fi nancial institution and can have a fi xed or variable rate of

interest. • In addition, there is a registration fee which must be paid by the borrower to the lender. The registration fee

and a portion of the interest are submitted to Industry Canada to help off set the costs of the program for the government.

Government also off ers many similar programs whose primary focus is not on fi nancing but rather on small business development, including: Business Development Bank, Industrial Research Assistance program, Global Commerce Support program and tax incentives and write-off s.


How does a lender decide if a small business is deserving of a loan? Consider the 5 Cs of credit:

1. Character of the borrower • Is the borrower trustworthy; will the borrower use the money responsibly, and work hard to ensure the

business venture succeeds; does the borrower have any expertise/knowledge?

2. Capacity to repay the loan • Will the borrower be able to repay the loan according to the terms of the agreement?

3. Capital being invested in the venture by the borrower • Has the borrower invested any of his/her own funds in the venture?

4. Conditions of the industry and economy • What is the current and forecasted economic landscape for the business/industry?

5. Collateral available to secure the loan • Does the borrower have collateral to secure against the loan in the event that the venture fails?

Equity fi nancing in more detail

Venture capital fi rms• Venture capitalist: an investor or investment group that commits money to new business ventures. • Usually the venture capitalist provides fi nancing to a new business, but the investment takes the form of

convertible debt or convertible preferred stock. This way, they have senior claim over the assets should the business fail, or they can convert stock to actively participate in the business if it is successful.

• Venture capitalists typically provide a large source of fi nancing to a business.• It is not a loan, therefore, it is does not need to be prepaid and no interest is charged.• The entrepreneur is selling part of his/her business to someone else. Is the business person comfortable

with this? What percentage of his/her company is he/she willing to part with? Is he/she willing to give up control (> 50%) to someone else? Is he/she willing to share profi ts?

Stock sales• Selling shares of the company to outside investors.• Usually very diffi cult to do, especially for companies that are new with no track record as investors are

usually reluctant to purchase shares.• Like venture capitalist, this is not a loan, so there are no interest charges, but the owner must give up a

percentage of the company.

What are the di� erent fi nancing methods available? (cont’d)

A P P E N D I X A


Financing options chart

A P P E N D I X B

Debt capital

Equity capital

Personal savings and credit cards

Friends and relatives

BanksGovernment assistance programs

Venture capitalists

Selling shares

Additional interest

Annual fees

Collateral

Covenants

Diffi cult to acquire

Easy to acquire

High interest

High penalties

Late charges

Leveraging

Loan

Losing portion of company

Strain interpersonal bonds

No repayment

Off er suggestions re: management of business

Repayment: interest

Repayment: principal

Canada small business fi nancing

Stock and shares


Financing options characteristics

A P P E N D I X C

Print terms, cut into strips and draw from hat.

Additional interest

Annual fees

Collateral

Covenants

Di� cult to acquire

Easy to acquire

High interest

High penalties

Late charges

Leveraging

Loan

Losing portion of company

Strain interpersonal bonds

No repayment

O� er suggestions re: management of business

Repayment: interest

Repayment: principal

Canada small business fi nancing

Stock and shares


Financing options pros and cons

Review sheet

Equity capital

Pros Cons

Venture capitalist

Pros Cons

Stock sales

Pros Cons

A P P E N D I X D


Financing options pros and cons (cont’d)

Debt capital

Pros Cons

Personal savings

Pros Cons

Friends and relatives

Pros Cons

A P P E N D I X D


Financing options pros and cons (cont’d)

Bank

Pros Cons

Government sponsored agencies and programs

Pros Cons

A P P E N D I X D


Crossword puzzle

A P P E N D I X E

1

5

4

3

76

8

9

10

11 12

13

14

15

2

Across

5. A business-minded individual. 7. Repaid on principal owed. 9. To raise or supply money. 10. A loan secured by property. 11. A capital sum lent or borrowed. 13. Restrictions placed on debt fi nancing. 14. Ability to reay loan. 15. Stocks or assets used for carrying on a

business.

Down

1. Anything owned that has value. 2. Personal money put away for future use. 3. A risky business. 4. Someone willing to put capital into your business 6. Ownership in a company. 8. Primary lender for small business. 12. A sum owing, an obligation.

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